Pension Your Way To Financial FreedomEoin Buckley
Pension Your Way to Financial Freedom
The mere mention of the word ‘pension’ may cause the average reader to feel immediately drowsy, however a pension is simply a longer term savings plan with extremely generous tax reliefs attaching.
Regardless of whether we are talking about savings inside or outside a pension structure, there are still only the same five main asset classes to choose from; cash, bonds, equities, property and alternatives. In broad terms, your decision on where to invest depends on your timeframe and your attitude to risk. As the normal pension timeframe is reasonably long, subject to a personal risk assessment, the average investor should consider accepting some level of investment risk in order to do better than low yielding deposit accounts.
For pension investors seeking returns in excess of inflation over the medium to long term, I believe a broadly diversified unit linked multi asset fund is an effective way to gain exposure to all five asset classes. As you would expect, lower risk multi asset funds will have a higher allocation of cash and bonds whereas higher risk multi asset funds will have a higher weighting towards equities and property. A monthly pension contribution is by definition a drip feeding plan and this will be an ideal way to access the investment markets in a more cautious manner.
Many of us pay the top rate of income tax and don’t realise the real tax saving opportunities immediately at our disposal. A single person hits the top 40% income tax rate on all earnings above € 33,800. The offer of 40% tax relief is there for the taking which means that for every € 100 that you decide to contribute, you only fund € 60 of this as the Revenue effectively funds the remaining € 40. To review these same numbers from another perspective, this means your € 60 receives a government paid bonus of € 40 which equates to an instant top up of 67%! Employee paid pension contributions offer a risk free return of 67% at the point of entry and somehow, many people remain uninterested! Employer paid contributions can attract even higher levels of tax relief but in the interests of brevity, we will leave that additional opportunity for another day’s discussion.
Even if an immediate and risk free bonus of 67% somehow remains not enough of a carrot to entice you in, next we have the added and much underrated advantage that while within your pension structure, your entire retirement fund grows tax free. Therefore DIRT, exit tax, capital gains tax and income taxes do not apply to your investment growth within your retirement fund.
At retirement, you will avail of tax free lump sum benefits and with the remainder, you may choose to avail of continued tax free investment growth via an AMRF and an ARF. In simple terms, your monies contributed avail of tax relief firstly on the way in, secondly while within your pension structure and thirdly on the way out.
I am always taken aback when I compare the current apathy for pensions to the past success of the SSIA. In excess of 1 million Irish savers bought into the SSIA concept which only provided a top up of 25%. Granted the SSIA only asked investors to commit for five years but so many ended up rolling on these monies to new and what subsequently became very long investment terms. Ostensibly, a pension is perceived as far too long a commitment to endure. Let’s now uncover just how flexible a friend your pension fund can be in times of financial need.
PRSAs and personal pensions can be accessed as standard at age 60. You don’t even need to actually retire, you may choose to keep working and draw on your pension so long as you are aged 60 or over. Employee members of an occupational pension scheme who have left that previous employment may access that pension fund from age 50 onwards. If you are like me, you may be at the stage where you consider 50 to be very young! In circumstances of serious ill health, access to your pension fund may be granted at any age. Should you die pre-retirement and before drawing on your pension fund, the full fund value of either a PRSA or personal pension would be paid out immediately and tax free to a spouse, once again regardless of age.
While I am most definitely not an advocate of raiding your pension fund at the earliest available opportunity, it might help us all commit to funding more pension contributions now if we become fully aware that by doing so, we are building an incredibly tax efficient and flexible financial safety net and one that might be accessed sooner than you thought!
Eoin Buckley is a Certified Financial Planner and Director of ABM Financial Advisers in Cork. Eoin can be contacted on [email protected]. ABM Financial Advisers Limited is regulated by the Central Bank of Ireland.